No quick fix for Euro - maybe a slow one?
- 24 May 2012
- From the section Business
If you know anything about the Euro crisis you will know that there are "no quick fixes". But it's been going on so long now, you'd think there might have been time for a slow one.
I discussed part of the long-term economic solution to the region's problems on Wednesday night in a piece for the BBC's 10pm television news: in or out of the Euro, to have any chance of growing their way out of trouble, the crisis economies need to rebuild their competitiveness.
That means Germany has to lose some of its competitive edge, at least within the single currency zone. Why? Because, like it or not - and Germans don't - competitiveness is inherently relative.
You always have to be more or less competitive, compared with someone else.
As I have discussed many times, the huge imbalances that grew up between different parts of the Eurozone before the crisis were in large part a reflection of the fact that northern economies like Germany and the Netherlands were becoming a lot more competitive than the ones in the south.
Thursday's PMI surveys for the Eurozone make for a depressing read - there's little sign that those crisis economies are about to grow their way to a better future any time soon. Quite the opposite.
There is also disturbing evidence that the weakness in the so-called periphery countries has spread to the 'core' - not just France, where the index reflecting new manufacturing orders fell to its lowest level since 2009, but also to Germany.
Taken together, these and other recent data suggest the Eurozone will shrink in the second quarter, having only very narrowly avoided a negative figure for the first three months of 2012.
But, if you step back from the monthly and quarterly figures, there IS quite a lot of evidence that the slow economic fix to the crisis is happening.
Costs are being squeezed in the crisis countries - and pushed up in Germany. This German recovery has also been a bit more consumption-led than in the past.
Economists at Commerzbank reckon that Irish unit labour costs, at the start of 2009, had risen about 23% faster than the Eurozone average since the start of the euro.
The gap now is about 8%. Spain went into this period with unit labour costs that had grown 10% faster than the average - that has also more than halved since 2009.
You can point to similar progress in Portugal and Greece. The only country that has not really made up the ground it had lost is Italy.
German labour costs were kept broadly flat during the 2009-10 ( it's one of the factors that kept their employment so stable during the recession).
But there are signs that they are now creeping up - notably, in that 4.3% pay deal for the IG Metall union last weekend, which covers more than 3 million workers and sets the tone for a lot of others.
If that continues, Commerzbank reckons the periphery could rebuild their competitiveness vis a vis Germany by 2015 - two years earlier than if German costs remain flat.
Other estimates suggest that a 4% inflation rate in Germany would allow the ECB to stick to its 2% target for the Eurozone as a whole, but save the periphery from outright deflation.
That may not be politically feasible. But of course, things would be easier still for the south if Germany's recovery continued to be driven by consumption, as well as the traditional exports.
All of these parts of a slow-burn solution to the economic piece of the crisis are actually happening - however dark the headlines.
The problem is they are happening too slowly for financial markets - and they are happening with too little growth, especially in the periphery, for ordinary people to see any light at the tunnel, and for these countries' debt dynamics to start looking remotely sustainable.
Reason enough for politicians to keep searching for that elusive quick fix.